South-Western College Publishing - Economics  
Traditional Burial Business Goes Up in Flames
Subject Sources of monopoly, comparative statics
Topic Monopoly
Key Words Industry, competition, discount, cost, regulations, price, charges
News Story

The traditional funeral industry is facing increased competition. Discount casket stores are springing up, many on the Internet. On average, families pay $2,176 for a casket; discounters estimate they can halve the cost. Cemeteries now offer ceremonies and services customarily provided by funeral homes. Some families are foregoing viewing of the body and chapel services in favor of nontraditional ceremonies. Cremations now account for one-fourth of all funerals. The cost is only approximately $500 plus extras, such as urns and vault drawer markers.

These trends are occurring in the wake of a stable death rate and stricter government regulations on funeral pricing. Since 1984, funeral homes have been required to itemize charges (including the expensive "professional service charges"), rather than give a single price for a funeral. In 1994, the homes were prevented from penalizing families that wanted to buy the casket elsewhere.

Traditional funeral directors want the regulations that apply to them also to apply to other providers of so-called death care services. The regulations would require price lists to be published and goods and services to be guaranteed. Cemeteries believe that their costs would rise.

(Updated November 1, 1999)

Questions
1. The funeral industry historically approximated a monopoly. Assume each local area market was dominated by a single funeral home.
  a. Draw a price/cost-output diagram of a local area funeral home. Add the demand and marginal revenue curves, and the marginal cost and average total cost curves. Show the profit that was earned before recent developments.
  b. While the death rate has been steady, involving only minor increases in funerals, the percentage of consumers choosing cremation has risen. How has this affected the equilibrium of the local monopolist funeral home? Illustrate your answer.
2. Draw a second diagram of the local monopoly funeral home.
  a. How has the onset of competition from cemeteries and from casket suppliers affected the demand curve of the local industry?
  b. Illustrate the consequences for the industry's equilibrium price, output, and profit.
3. The industry is responding by asking for regulations to be put on the providers of caskets.
  a. Why would the regulations increase the cost of cemeteries that provide death care services?
  b. What effect would this have on traditional providers?
Source Richard Willing, "Funeral homes fight for life, "USA Today, October 8-10, 1999.

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